Munis rally in constructive trading, outperform UST

Bonds

Municipals rallied across the yield curve Wednesday, outperforming U.S. Treasuries and seeing the greatest gains out long after stronger retail sales data signaled the Fed’s tightening is not yet over, pushing equities into the red.

Retail sales increased 1.3% in October, slightly above the consensus forecast of 1.0% and a significant improvement from the flat reading in September.

“The largest retail sales increase in eight months shows consumers still aren’t shying away from paying higher prices,” noted Scott Anderson, chief economist and executive vice president at Bank of the West Economics.

Municipal triple-A yields fell as much as 15 basis points out long as a constructive secondary tone emerged and lighter supply encouraged better performance outperforming smaller moves in UST.

The three-year muni-UST ratio on Wednesday was at 68%, the five-year at 74%, the 10-year at 79% and the 30-year at 94%, according to Refinitiv MMD’s 3 p.m. read. ICE Data Services had the three at 69%, the five at 73%, the 10 at 80% and the 30 at 94% at a 4 p.m. read.

As market participants navigate through the remaining weeks of 2022, Jeff Lipton, managing director of credit research at Oppenheimer Inc., expects munis to maintain their outperformance over USTs “despite higher rates creating negative year-to-date returns across all fixed income asset classes.”

Returns so far in November are in the positive with the Bloomberg Municipal Index at +2.52% month-to-date and long-dated (22+ years) performing the best at +4.44%. High-yield is at +3.55%, taxable munis at +2.61% and the Impact Index at +2.82%.

Lipton said munis are “generally being well-placed in the primary and well-bid in the secondary,” and he expects “this dynamic to hold steady through year-end, particularly as new-issue supply is constrained.”

As UST securities display sharper yield movements, he said that “munis should largely hold steady given the demand for product.”

And while muni performance will end 2022 in the red due to rising bond yields and accompanying price erosion, he said “the attractive cash-flows have created a strong ‘carry’ component to performance, providing an offset to the lack of any price appreciation as well as defensive attributes ahead of a potential recession.”

This will most likely extend into 2023, although he expects “far less price erosion and perhaps there may be opportunities to experience some price advancement.”

With the current outperformance, relative value ratios have declined with the 10- and 30-year benchmarks at 79% and 94% respectively, per MMD, though the ratios are “still well within that fair to attractive value range,” according to Lipton.

“Furthermore, while bid-wanted lists remain active, the fact that much of the sale proceeds are being reinvested back into the market following year-end tax loss harvesting has buoyed long-duration tax-exempts,” he said.

Outflows continue with the Investment Company Institute reporting that investors pulled $3.188 billion from mutual funds in the week ending Nov. 9 after $3.816 billion of outflows the previous week.

Exchange-traded funds saw another week of inflows at $942 million after $1.108 billion of inflows the week prior, per ICI data.

Lipton said the muni market is “being teed up to enter 2023 from a relative position of strength.”

“Credit quality remains strong across the broad array of muni sectors, absolute yields and attractive and competitive cashflows provide a compelling argument to put sidelined cash to work, better relative value opportunities support future investment performance, and market technicals should bolster outperformance,” he said.

Next year, he said muni credit will be “generally secure and future prospects will be closely tied to the overall growth trajectory of the national economy.”

For 2022, he noted, recession has been averted but does “see the possible emergence of a contraction, albeit relatively modest,” in the second half of 2023.

In the primary market Wednesday, BofA Securities priced for the Metropolitan Nashville Airport Authority (A1//AA+/AA-/) $602. 365 million of airport improvement revenue bonds. The first tranche, $95.585 million of non-AMT bonds, Series 2022A, saw 5s of 7/2026 at 3.01%, 5s of 2027 at 3.06%, 5s of 2032 at 3.30%, 5s of 2037 at 3.91%, 5s of 2042 at 4.16%, 5.25s of 2047 at 4.26% and 5s of 2052 at 4.42%, callable 7/1/2032.

The second tranche, $506.780 million of AMT bonds, Series 2022B, saw 5s of 7/2026 at 3.71%, 5s of 2027 at 3.75%, 5.25s of 2032 at 4.03%, 5.5s of 2037 at 4.43%, 5.5s of 2042 at 4.61%, 5.25s of 2047 at 4.88%, 5s of 2052 at par and 5.5s of 2052 at 4.87%, callable 7/1/2032.

Wells Fargo Bank priced for the Louisiana Local Government Environmental Facilities and Community Development Authority (A1///AA-) $458 million of Louisiana Insurance Guaranty Association Project insurance assessment revenue bonds, Series 2022B, with 5s of 8/2025 at 3.21%, 5s of 2027 at 3.34%, 5s of 2032 at 3.70% and 5s of 2037 at 4.21%, callable 8/15/2027.

Loop Capital Markets priced for the Ohio Water Development Authority (Aaa/AAA//) $150 million of sustainability Drinking Water Assistance Fund revenue bonds, Series 2022A, with 5s of 12/2025 at 2.82%, 5s of 6/2027 at 2.84%, 5s of 12/2027 at 2.84%,5s of 6/2032 at 3.01%, 5s of 12/2032 at 3.02%, 5s of 12/2037 at 3.42% and 5s of 12/2042 at 3.66%, callable 12/1/2032.

J.P. Morgan Securities priced for the Santa Clara Valley Water District, California, (Aa1//AA+/) $121.740 million. The first tranche, $75.295 million of Safe Clean Water Program refunding revenue bonds, Series 2022A, saw 5s of 8/2023 at 2.77%, 5s of 2027 at 2.86%, 5s of 2032 at 2.90%, 5s of 2037 at 3.47%, 5s of 2042 at 3.81%, 5s of 2047 at 3.95% and 5s of 2049 at 4.03%, callable 8/1/2032.

The second tranche, $46.445 million of Safe Clean Water Program revenue certificates of participation, Series 2022B, saw 5s of 12/2026 at 2.86%, callable 11/1/2026.

In the primary Tuesday, Loop Capital Markets priced for the New York City Municipal Water Finance Authority (Aa1/AA+/AA+/) $750 million of water and sewer system second general resolution revenue bonds, Fiscal 2023 Series AA. The first tranche, $396.005 million of Subseries AA-1, saw 5.25s of 6/2052 at 4.31%.

The second tranche, $79.210 million of Subseries AA-2, saw 5s of 6/2028 at 3.00% and 5s of 2032 at 3.14%.

The third tranche, $274.785 million of Subseries AA-3, saw 4.5s of 6/2047 at 4.27% and 5s of 2047 at 4.50%.

Informa: Money market munis see outflows
Tax-exempt municipal money market funds saw $315.4 million of outflows the week ending Monday, bringing the total assets to $112.73 billion, according to the Money Fund Report, a publication of Informa Financial Intelligence.

The average seven-day simple yield for all tax-free and municipal money-market funds fell to 1.76%,

Taxable money-fund assets inflows of $7.23 billion to end the reporting week at $4.453 trillion of total net assets. The average seven-day simple yield for all taxable reporting funds rose to 3.36%.

AAA scales
Refinitiv MMD’s scale was bumped 12 to 15 basis points: the one-year at 2.79% (-12) and 2.80% (-12) in two years. The five-year at 2.84% (-12), the 10-year at 2.94% (-12) and the 30-year at 3.62% (-15).

The ICE AAA yield curve was bumped eight to 11 basis points: 2.81% (-8) in 2023 and 2.85% (-8) in 2024. The five-year at 2.87% (-9), the 10-year was at 3.02% (-10) and the 30-year yield was at 3.78% (-9) at a 4 p.m. read.

The IHS Markit municipal curve was bumped 15 basis points: 2.74% (-15) in 2023 and 2.76% (-15) in 2024. The five-year was at 2.80% (-15), the 10-year was at 2.91% (-15) and the 30-year yield was at 3.62% (-15) at a4 p.m. read.

Bloomberg BVAL was bumped 12 to 15 basis points: 2.78% (-12) in 2023 and 2.82% (-13) in 2024. The five-year at 2.84% (-12), the 10-year at 2.90% (-13) and the 30-year at 3.63% (-15) at 4 p.m.

Treasuries were better five years and out.

The two-year UST was yielding 4.362% (+2), the three-year was at 4.140% (flat), the five-year at 3.848% (-4), the seven-year 3.777% (-7), the 10-year yielding 3.683% (-9), the 20-year at 4.061% (-13) and the 30-year Treasury was yielding 3.835% (-12) at the close.

Primary to come:
The Los Angeles Department of Water and Power (Aa2//AA-/AA/) is set to price $239.140 million of power system revenue bonds, 2022 Series E, serials 2023-2030. TD Securities.

The Washington Economic Development Finance Authority (Aaa///) is set to price Thursday $165 million of Mura Cascade ELP LLC Project environmental facilities revenue and refunding bonds, Series 2022. J.P. Morgan Securities.

The Illinois Housing Development Authority (Aaa///) is set to price Thursday $150 million of non-AMT social revenue bonds, 2022 Series G, serials 2023-2034, terms 2037, 2042, 2046 and 2052. RBC Capital Markets.

The Dormitory Authority of the State of New York (A1///) is set to price Thursday $114.975 million of Rochester Institute of Technology revenue bonds, Series 2022A, serials 2028-2042. RBC Capital Markets.

The Mississippi Business Finance Corporation is set to price Thursday $100 million of green Enviva Inc. Project exempt facilities revenue bonds, Series 2022. Citigroup Global Markets.

The State Center Community College District, California, (Aa1///) is set to price Thursday $100 million of Election of 2016 general obligation bonds, Series 2022C. Morgan Stanley & Co.

Competitive:
The Florida Department of Transportation Finance Corp. is set to sell $104.535 million of revenue bonds, Series 2022, at 10:30 a.m. eastern Thursday.

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